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VCs & Their Missing Sleeves

Venture folks are fond of saying that they roll up their sleeves and work with portfolio companies. The reality is that, like most people, they’d rather not. As is superficially rational, they’d prefer to have a fully-formed company — team, technology, market, and traction — than have something missing in any of those key pieces.Fair enough, but here’s the problem: Almost everywhere in the U.S., Canada, and Europe other than Silicon Valley (and maybe Boston) that’s a pipe dream. There just aren’t enough experienced entrepreneurs floating around such that every technology gets a team, or vice-versa. It just doesn’t work that way. More likely is that when a typical project crosses the transom you’ve got technology, a semblance of a CTO, and some vaguely interested customers, and that’s it.
So if you’re a VC and you take the I’m-waiting-for-the-good-stuff approach you either rarely invest, or you end up in bidding wars for the few decent investments that show up fully-formed.
And what should happen when a quarter-formed venture shows up? Well — and here is where we separate the real VCs from the poseurs — most venture guys will point out the deficiencies in the team, technology, and customer prospects, and then send you off on your not-so-merry way to fix the problem. If you’re lucky, they may promise to make a few phone calls to customers are supposed entrepreneurs they have in their stable, which odds are they won’t make — or they won’t follow-up on if they don’t make contact the first time.
On the other hand, really good venture folks say “Yeah, whatever”, take a deep breath, and then dive in. Assuming they liked you enough to bring you in in the first place, they then work their ass off to try and help you get the team, technology, and traction worked out. Assuming you’re working hard at it too, they work with you, calling people, helping you with the business thesis, and suggesting and even calling some customers.
Why? Because the venture business has changed. In most places you can’t simply hang out a shingle and hope fully-formed venture-fundable teams trip through the doorway. And in the few places where that is the case, the amount of capital floating around is such that the investment immediately turns into an auction with the venture guy forced to over-pay for the privilege of investing.
But most VCs don’t actually have the sleeves they claim to be ready to roll up. The few that do — and there are less of them in the Valley than you might think — are rare and valuable flowers indeed.
For their part most venture guys will either say that they already do this, or that I’m wildly underestimating the amount of time required to be a sleeve-roller, or, worse yet, that most VCs don’t have useful practical insights beyond “Fire the CEO”, so they’re best kept at a distance from strategy. Fair enough. Most VCs don’t have those insights, but the market is Darwinian. Because it is really, really time-consuming being helpful, and that comes on top of board work and the rest of the stuff that is already a time-killer.
So what though. As LPs increasingly realize, venture firms that aren’t prepared to really and truly originate deals are venture firms whose returns are regressing inexorably to public market returns less an illiquidity discount. And where do you originate deals? From nascent technologies — labs and universities — and nascent teams.
It is enough to make any would-be venture capitalists shudder. And that’s good. Because getting higher venture returns is about to get a lot harder, but then again no-one said doing venture investing was supposed to be easy.

Comments

further sources of pressure on vc returns:
my startup can be thought of as a ‘net api’-based platform play — with an associated platform fund.
we will be ready from day one to provide seed funding to promising app-builders as they make known their plans to leverage our api…
what’s more, we want to help the app-builders find growth capital on the most favorable terms (i.e., via dutch auction direct public offerings), which means doing to vcs what google did to underwriters…
all told, we’re just better for the start-ups, as incentives align much more closely…
and i can’t imagine ours will be the only such platform play…

Maybe…but in my experience–as a VC–VCs are terrible when they “roll up sleeves”. Most have no operational experience or clue about people or business. They are finance types, and arrogant at that. They should stick to being investors. Their only idea seems to be “change the CEO”. It’s funny, but sad, too.

Agreed. In my experience as a VC most VCs are crap when they roll up their sleeves. And yes, most of them think that the only strategic change worth mentioning is “Change the CEO”. Nuts.
But while there will always be room for pure investor-VCs, that is not the same thing as saying they will earn the highest returns. I’m arguing that given the amount of capital under management, and given the likelihood that deal auctions will be the rule for everyone but KP/Sequoia/Mayfield, people are nuts if they think they can get first decile returns without changing the rules.